Kinder Morgan, Inc. (NYSE:KMI) Q1 2024 Earnings Call Transcript

Kinder Morgan, Inc. (NYSE:KMI) Q1 2024 Earnings Call Transcript April 17, 2024

Kinder Morgan, Inc. beats earnings expectations. Reported EPS is $0.34, expectations were $0.33. KMI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Quarterly Earnings Conference Call. [Operator Instructions] Today’s call is being recorded. If you have any objections, please disconnect at this time. I’ll now turn the call over to Mr. Rich Kinder, Executive Chairman of Kinder Morgan. Thank you. You may begin.

Rich Kinder: Thank you, Ted. As always, before we begin, I’d like to remind you that KMI’s earnings release today and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and of course, the Securities Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosure on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC for important material assumptions, expectations and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements.

Before turning the call over to Kim and the team who reported a good quarter at KMI, let me comment on another broader issue. In past quarters, I’ve talked a lot about the demand for natural gas resulting from this country’s LNG export facilities. Today, I want to speak briefly about what I and others in the industry now see as another source of increased demand for our commodity, the tremendous expected growth in the need for electric power. This growth is being driven by a number of factors, most prominently by the increasing demand of new and expanding data centers, especially those required to support AI. One recent survey showed a projected increase in electric demand to power data centers of 13% to 15% compounded annually through 2030.

Put another way, data centers used about 2.5% of U.S. electricity in 2022 and are projected to use about 20% by 2030. AI demand alone is projected at about 15% of demand in 2030. If just 40% of that AI demand is served by natural gas that would result in incremental demand of 7 to 10 Bcf a day. Utilities throughout America are sounding alarm, one Southeast utility announced its expectation that its winter demand would increase by 37% by 2031. PJM Interconnection, which operates the wholesale power market across part of the Midwest and the Northeast, has doubled its 15-year annual forecast for demand growth and estimates that demand in the region by 2029 will increase by about 10 gigawatts. Now to put that in perspective, 10 gigawatts is about twice the power demand in New York City on a typical day.

The overriding question is how to handle this increased demand? To answer that question, it’s important to understand the nature of the increased demand. It’s become increasingly obvious that reliability and affordability are the key factors. The power needed for AI and the massive data centers being built today and plan for the near future, require affordable electricity that is available without interruption 24 hours a day, 365 days a year. This type of need demonstrates that the emphasis on renewables as the only source of power is fatally flawed in terms of meeting the real demands of the market. This is not a knock on renewables. We all know they will play a significant role in the future of electric generation. But it’s a reminder, all of us that natural gas and nuclear still have an extremely important role to play in order to provide the uninterrupted power that AI and the data centers will need.

The primary use of these data centers is big tech and I believe they’re beginning to recognize the role that natural gas and nuclear must play. They like the rest of us, realize that the wind doesn’t blow all the time, the sun doesn’t shine all the time, that the use of batteries to overcome the shortfall is not practically or economically feasible. And finally, that unfortunately, adding significant amounts of new nuclear power to the mix is not going to happen in the foreseeable future. In addition to all these factors, the market is now understanding that building transmission lines to connect distant renewables to the grid, typically takes years to complete and that’s a timeframe inconsistent with the need to place these data centers into service as quickly as possible.

All this means that natural gas must play an important role in power generation for years to come. I think acceptance of this hypothesis will become even clearer as power demand increases over the coming months and years and it will be one more significant driver of growth in the demand for natural gas that will benefit all of us in the midstream sector. And with that, I’ll turn it over to Kim.

Kim Dang: Okay. Thanks Rich. I’m going to make a few overall points, and then I’ll turn it over to Tom and David to give you all the details. We had a great quarter. Adjusted EPS increased by 13%, EBITDA was up 7%, and that was driven by strong performance in natural gas and our refined products businesses. This type of growth is tremendous for a stable fee-based set of midstream assets as large as ours. So, the balance sheet remains strong. We ended the quarter at 4.1 times debt-to-EBITDA and we continue to return significant value to shareholders. Today, our Board approved an increase in the dividend of $0.02 per share. This is the seventh year in a row that we’ve increased the dividend. Our financial outlook of 14% growth and adjusted EPS for the year as well as the other budget guidance we provided in January is unchanged.

We’ve seen much lower gas prices than we anticipated this year, but the long-term fundamentals in natural gas remain very strong. Gas demand is expected to grow significantly between now and 2030 with a more than doubling of LNG exports as well as a 50% increase in exports to Mexico. And that doesn’t include the anticipated substantial increase in gas demand from power associated with AI and data centers that Rich just mentioned, estimates we’ve seen range anywhere from 3 Bcf to over 10 Bcf and we’ve seen some estimates as high as 16 Bcf. With respect to the LNG pause, we do not think it impacts our planned projects or the growth in the LNG market between now and 2030, although it could impact the mix of projects. But we think that is an – we think the LNG pause is an unwise decision and bad policy.

Our petroleum products business continues to produce very stable cash flow. Volumes are steady and much of the business has tariff for contract escalators. It will produce nice cash flow for years to come. It’s also a capital-efficient business and have some nice growth opportunities around the edges in product blending, renewable diesel, and other sustainable fuels. Our backlog of projects increased by about $300 million during the quarter due to new natural gas projects added. The backlog and the multiple on the backlog remains less than 5 times. And I also think that we’ve got significant opportunity to add to the backlog within the next year. In our ETV business, we secured port space in the Houston Ship Channel for CO2 sequestration with capacity to store more than 300 million tons.

Significant distance between the emitting source and the sequestration site often challenges CCS economics, and we’ve secured a very strategically located site. So we had a nice quarter in terms of growth. We continue to expect nice growth for the year. We’ve got a sound balance sheet. We returned significant value to our shareholders and we have nice opportunities to invest in the longer-term. With that, I’ll turn it over to Tom to give you details on the business performance for the quarter.

Tom Martin: Thanks, Kim. Starting with the natural gas business unit. Transport volumes increased by 2% for the quarter versus the first quarter of 2023, driven primarily by increased flows eastbound on our Rockies interstate pipelines into the Mid-Continent region. The Permian Highway expansion project being placed into service. An increased flows into our LNG customers in Texas, partially offset by decreased volumes delivered to local distribution companies on the East Coast as we had a warmer winter this quarter compared to the first quarter of 2023. Our natural gas gathering volumes were up 17% for the quarter compared to the first quarter of 2023, driven by the Haynesville and Eagle Ford volumes, which were up 35% and 12%, respectively.

Given the low price environment, we are now expecting gathering of volumes to average 5% below our 2024 plan, but still 7% over 2023 adjusting for asset sales in both cases. With delayed about 10% of our 2024 budgeted G&P CapEx spend until supply growth returns. And we view this slight pullback in gathering volumes as temporary given higher production volumes will be necessary to meet the demand growth from LNG expected in early 2025. A quick update on our newly acquired South Texas Midstream assets in our Texas intrastate market. The integration of the assets and personnel is going well. We are progressing some of the upside opportunities that we assumed in the acquisition sooner than expected. We feel very good about the long-term earnings expectation and valuation multiple for the acquisition.

Our experience and other acquisitions has been that we tend to achieve more value over time than we originally expected from acquiring assets that are highly integrated with our existing network. We are already seeing evidence of that of these assets. In our Products Pipeline segment, refined product and crude and condensate volumes were down 1% for the quarter versus 2023. Gasoline volumes were down 3%, partially offset by an increase in diesel and jet fuel, 2% and 1% increases, respectively. RD volumes flowing through our assets in California continue to grow. We averaged 37,000 barrels a day for the quarter, and we’re exploring opportunities to expand our RD capabilities in the Pacific Northwest. Our Terminals segment – our liquids lease capacity remains high at 94%.

Utilization at our key hubs at the Houston Ship Channel in the New York Harbor remained very strong, primarily due to favorable blend margins. Our Jones Act tankers are 100% leased through 2024 and 92% leased through 2025, assuming likely options are exercised. The CO2 business segment experienced a 4% lower oil production volumes, 9% higher NGL volumes, and 7% lower CO2 volumes in the quarter versus the first quarter of 2023. With that, I’ll turn it over to David Michels.

David Michels: Okay. Thank you, Tom. So for the first quarter of 2024, we’re declaring a dividend of $0.2875 per share, which is $1.15 per share annualized up 2% from 2023. For the quarter, we generated revenues of $3.85 billion, which was down $38 million from Q1 of 2023. Our cost of sales was down $108 million, so our gross margin increased 3%, which explains most of the 2% growth in our operating income. Earnings from equity investments is up $78 million, but $65 million of that was due to a non-cash impairment we took in the first quarter of last year. We saw year-over-year growth from our natural gas, products and terminals businesses. The main drivers of that growth came from project contributions, growth project contributions placed in service across each of those business units as well as from additional contributions from our acquired South Texas Midstream assets.

We also had higher margins on our natural gas storage assets and higher volumes on our natural gas gathering systems. Interest expense was up due to a higher short-term debt balance due in part to the South Texas acquisition, and we generated net income attributable to KMI of $746 million and EPS of $0.33, both up 10% from Q1 of last year. On an adjusted net income basis, which excludes certain items, we generated $758 million, up 12% from Q1 of last year. And we generated adjusted EPS of $0.34, up 13% from last year. So nice growth as Kim mentioned. Our average share count reduced by 27 million shares or 1% due to our share repurchase efforts. And our DCF per share was $0.64, up 5% from last year. Our first quarter DCF was impacted by higher cash taxes and sustaining CapEx, but that is due to timing of our cash tax payments and maintenance projects.

We expect cash taxes to be favorable for the full year and sustaining capital to be in line with our budget for the full year. On our balance sheet, we ended the first quarter with $31.9 billion of net debt, which increased $94 million from the beginning of the year. And here is a high-level reconciliation of that increase. We generated $1.189 billion of cash flow from operations. We paid $630 million in dividends, and we spent about $620 million in total capital, including growth sustaining and contributions to our joint ventures. Finally, as you can see in our press release, we are adjusting our long-term leverage target from around 4.5 times to a range of 3.5 to 4.5 times. We’ve been operating near the midpoint of that range for several years, and we believe this range is the appropriate long-term guidance for a company like ours that has significant scale in a high-quality business mix, which produces stable cash flows backed by multiyear contracts.

And now with that, back to Kim.

Kim Dang: Thanks. Ted, if you would open it up for Q&A, we’ll take the first question.

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Q&A Session

Operator: [Operator Instructions] The first question is from John Mackay with Goldman Sachs. Your line is open.

John Mackay: Hi, good afternoon everyone. Thank you for the time. Maybe we’ll start on the leverage target because I know it’s been a focus for a while. I would love just to hear a little bit more on the decision process to bring it down. And then if we’re looking forward relative to how you guys have been operating the last few years, what are the kind of practical outputs you could say or decisions you’ll make internally with this new target? Thanks.

David Michels: Sure. So, we started assessing this when our actual operating leverage started gravitating further away from the target leverage of 4.5 times, the budget for 2024 has us at 3.9 times. So, that’s when we started assessing it. The timing of the change doesn’t really have any – there’s no magic to why we’re changing it now, except for that slight difference and gravitating away from the 4.5. The practical implications of this change are really – we’re not changing the way that we operate our company. We’ve always kind of had to leverage target of 4.5, but viewed having some cushion below that 4.5 as valuable. We think that this 3.5 to 4.5 is more reflective of where we’ve been operating and how we’ll continue to operate the company going forward.

Kim Dang: I would just reiterate what David said. It’s just bringing our policy in line with the way that we run the business. And so there is no change to our overall capital allocation philosophy.

John Mackay: All right. I appreciate that. And maybe shifting gears, you obviously started on the big demand ramp. We’re hoping to see on the power gen side. Talked through the – you guys talk through the macro really well. Maybe what I wanted to ask on is just tying that to the micro side. If we’re looking at Kinder over the next couple of years, where do you see the biggest opportunities for you guys specifically?

Kim Dang: Well, I think it’s pretty early in all of this. And so I think Rich laid out really well sort of what we expect to happen in that market. But if you look right now, I think we serve roughly 20% of the power market in the U.S. And so I think we would – and that’s of the overall power market, this will have – this will primarily be focused, we think, on gas because of what Rich said with respect to one consistent power or could have some renewable aspect with gas backup. I think nuclear just will take too long to develop, given when we expect this demand to happen. So, we move 40% of the gas in the U.S. And so we would expect to realize a significant portion of this opportunity. But putting an exact number on that right now is very difficult because we still don’t even know exactly how much the demand is going to be, as you can see from the range numbers that we discussed here earlier.

Rich Kinder: But if you just look at overall demand, we’ve been talking about for months and years, calibrating the demand for LNG export and how much that adds. This is another leg to the stool really. And whether it’s 5 Bcf a day, or 10 Bcf a day, we don’t know, but it’s clearly going to be another leg to the stool in terms of natural gas demand. And I think it will tend to be located near reliable electric generation because if you’re a Microsoft or Google, you want that power as close to your facility as possible.

Tom Martin: Yes, I guess one other additional point there, just if you look at the scale of our network across the country, Natural Gas, I think that gives us a great opportunity to serve this market wherever it develops. And I think our reach is unparalleled in the sector.

John Mackay: All right. I appreciate all that. Thank you very much.

Operator: Next question in the queue is from Michael Blum with Wells Fargo. Your line is open.

Michael Blum: Thanks. Good afternoon, everybody. I wanted to ask about the Permian, West Texas. Obviously, Waha prices have been negative of late. And I wonder if you can just remind us if there is a benefit there to you? Is there any negative impact just overall how those Waha prices are impacting you?

Rich Kinder: Yes. So just first, the price macro here at this point in time on micro is purely a result of that this warm winter that we had, I wouldn’t normally be this way. I’m not trying to predict pricing. That being said, on the intrastate markets, we do share in some of that upside with some of our proprietary storage that we hold. And so that’s where we see some of the benefit. It’s obviously longer-term, we’ve been saying this for some time. There’s – we see a need for another pipe, and I’ll just nip it in the bud. While I’m talking to you, we don’t have anything to announce today, but we continue to try and work on trying to commercialize another pipe still having discussions with customers along those fronts, but nothing to report this morning – this afternoon.

Kim Dang: We’ve got a little bit of capacity on PHP and GCX. We’ve hedged a lot of that for this year, but there’s a little bit open. But as you go out in time, more of that capacity is open. So we participate, I’d say, around the margin when those spreads blow out. So that delivers a little bit of benefit to our shareholders.

Michael Blum: Great. And then maybe if I can just push on that. So you said you’re still working on a project, nothing to announce. Is that more likely to be something like Permian Pass? Or do you think something more like GCX expansion could happen or both?

Rich Kinder: Well, look, we continue to try and commercialize both. As I said the last time, highly competitive. We think there’s a need. It’s just – it’s a matter of making sure we have the contract to support the investment.